Small caps are benefitting from domestic demand and their
earnings are insulated from global macroeconomic forces, said
Alan Richardson, who helps oversee about $82 billion for Samsung
Asset Management, including companies with values as low as $200
million. The Asian Development Bank this month raised its 2012
growth forecast for Southeast Asia, the only economic area
covered by the lender to get a boost.

“Investors are finding value in the small caps following a
sustained rally in the big caps,” Ng Soo Nam, Singapore-based
chief investment officer at Nikko Asset Management, which
oversees about $165 billion, said in an interview on Dec. 14.
“If the global environment stabilizes, we’re on the verge of a
pretty strong market performance next year.”

Southeast Asian countries including Laos, the Philippines
and Thailand are among the 12 best-performing stock markets
globally, according to data compiled by Bloomberg, posting the
biggest gains in Asia this year after Pakistan.

Higher Valuations

The gains in stocks have pushed valuations in Southeast
Asia to the highest in 16 months. The regional stock index
trades at 14.8 times estimated earnings, one of the highest
levels since August 2011, while the Southeast small-cap index
trades at 15.9. Those exceed the multiples for Asia-Pacific
markets including Australia, China, Hong Kong and South Korea,
according to data compiled by Bloomberg.

Northeast Asia stocks are expected to post bigger gains in
2013 than equities in Southeast Asia, which have become
expensive in the near term, Michael Kurtz, Nomura Holdings
Inc.’s global head of equity strategy, told reporters in Hong
Kong on Dec. 11.

Southeast Asia is also growing more reliant on trade with
China, a market that posted its slowest growth in three years,
according to the Organization for Economic Cooperation and
Development last month.

Still, the region’s growth will remain resilient over the
next five years as stronger investment and private consumption
reduce dependence on exports for expansion, the OECD said.

Economic Policies

The region’s economy is expected to expand 5.3 percent,
according to Manila-based ADB, up from an earlier forecast of
5.2 percent. Policy makers have loosened fiscal or monetary
policies this year to spur growth, with Philippine President
Benigno Aquino increasing spending to a record and Malaysian
Prime Minister Najib Razak boosting outlays.

“Small caps tend to be domestic-focused consumer
businesses,” said Richardson at Samsung Asset. “They’re
benefitting from monetary and fiscal stimulus of the governments
in Southeast Asia. That helps offset the external slowdown,
which is driving slower export growth.”

Retailers, Banks

Retailers and financial services companies including Siam
Makro PCL (MAKRO), the owner of Makro discount-store chain in Thailand,
and Bank OCBC NISP, the Indonesian banking unit of Singapore-
based Oversea-Chinese Banking Corp., are among the top holdings
of Aberdeen Asian Smaller Companies Investment Trust, according
to data compiled by Bloomberg. Aberdeen defines small caps as
companies with a market value that’s lower than $750 million.

Aberdeen is attracted to companies with “good solid
balance sheets, businesses benefitting from increased consumer
wealth and spending,” Hugh Young, who helps manage about $70
billion in Asian equities at Aberdeen Asset Management Asia Ltd.
in Singapore, said in an e-mailed response to queries, adding
that the stocks were “cheap” when it bought them.

Growing Wealth

The region’s wealth is also increasing as more millionaires
emerge, a report released by RBC Wealth Management and Capgemini
SA in September showed. The number of people in Asia-Pacific
with at least $1 million in investable assets jumped 1.6 percent
last year to 3.37 million, helped by gains in China, Japan,
Thailand, Malaysia and Indonesia.

“We’re seeing a boom in consumerism because of the rise of
per capita incomes in Southeast Asia,” said Mark Mobius, who
oversees more than $40 billion as chairman of Templeton Emerging
Markets, adding that “reforms and the breaking down of trade
barriers open opportunities for companies to become more
regional in scope.”